Bessie Liu

A cryptocurrency linked to a cost of living index is now available to select users on Ethereum scaling solution Arbitrum.



DeFi protocol Nuon announced in a blog post that it would be gradually rolling out its <a href="https://blockworks.co/news/what-are-flatcoins-and-are-they-a-better-inflation-hedge">NUON flatcoin</a> over the course of a month-long trial.&nbsp;



Once operations are confirmed to run smoothly, the cryptocurrency will be available to all users for permissionless minting via added collateral.



The protocol has chosen this “guarded launch” approach to minimize financial risks and repercussions.



“The guarded launch means that the WebApp will be alternating between Open and Closed states so as to better manage and control the launch and protest user’s funds,” the company said in a <a href="https://nuon.fi/blog/launch-release-note-and-faqs/" target="_blank" rel="noreferrer noopener">blog post</a>.



<h2 class="wp-block-heading">What is a flatcoin?</h2>



Flatcoins operate similarly to stablecoins, but rather than being pegged to the value of an asset — such as the US dollar or gold — it is pegged to an independent measure of the cost of living and its purchasing power remains “flat.”&nbsp;



The concept of this type of cryptocurrency is not entirely new. It has been discussed by the likes of Brian Armstrong and Vitalik Buterin, who <a href="https://www.youtube.com/watch?v=GUhDXUA4mfQ&amp;ab_channel=Coinbase" target="_blank" rel="noreferrer noopener">noted</a> in a podcast in August last year that “there is value in having some kind of cryptoasset that is intentionally designed to be as stable as possible.”



In the case of Nuon, its flatcoin is designed to hedge against inflation by recalibrating its daily value to account for the rising cost of living, <a href="https://truflation.com/methodology" target="_blank" rel="noreferrer noopener">using</a> the Truflation Index as an <a href="https://www.blockworksresearch.com/glossary#oracles" target="_blank" rel="noreferrer noopener">oracle</a>.



<h2 class="wp-block-heading">Stability and design&nbsp;</h2>



Nuon maintained its peg through what the team calls a “triple redundancy mechanism” where the protocol incentivizes users to “mint or burn NUON.”



If the price goes above the peg, the liquidation ratio drops, creating an incentive for users to mint more and sell the token. On the other hand, when the price of the token dips, the liquidation ratio increases, urging users to increase collateral or burn NUON to maintain safe collateral.



That means minters will have to have a reason to risk their collateral and watch the liquidation ratio closely.



Nuon CEO Stefan Rust acknowledges the risk but remains optimistic.



“Our vision for Nuon — inflation-proof money — is ambitious to say the least,” Rust said.



The mechanics differ from the failed <a href="https://blockworks.co/tag/terra">Terra USD</a> design in that NUON is only minted from collateral. In theory, that should put a buffer for the arbitrage mechanism to keep the peg.



Just as decentralized protocols are the answer to risks posed by centralized currencies, and over-collateralization is the answer to maintaining value in the face of market instability, inflation-proof flatcoins are the solution to preserving value over time.”



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‘Flatcoin’ Targets Inflation With Collateral-backed Arbitrum Stablecoin

Jack Kubinec

<div id="highlights-block_7e0bb56d72d98075122a85a49359128e" class="highlights">
 <ul>
 <li>The NUON flatcoin is pegged to the value of $1 on July 1, 2022 — theoretically worth $1.04 as of Monday</li>
 <li>“We&#8217;re trying to blend the best of both worlds where we take the user experience from the stablecoin market and the inflation hedge from bitcoin,” Laguna Labs&#8217; founder said</li>
 </ul>
 
</div>



As inflation rates go to the moon, so-called “flatcoins” are coming along for the ride.



Flatcoins are a new category of stablecoins that are pegged to the cost of living instead of real-world assets such as fiat currencies. Blockchain development house Laguna Labs is launching one of the first digital assets in this new category. If successful, their flatcoin could represent a legitimate inflation-hedging cryptocurrency as global <a href="https://cms.blockworks.co/newsletter/daily/?id=29456699" target="_blank" rel="noreferrer noopener">inflation figures remain hot</a>.



Their nuon flatcoin — which is now only on testnet — is designed to be pegged to the value of what $1 was on July 1, 2022. Once a day, the flatcoin’s value recalibrates to account for US dollar inflation. One nuon — worth $1 four months ago — would be theoretically valued at about $1.04 on Monday, if it were trading.&nbsp;



To produce its daily inflation adjustment, Nuon developed the <a href="https://app.truflation.com/" target="_blank" rel="noreferrer noopener">Truflation</a> algorithm, which tracks price movement across ten million items and produces a daily inflation estimate that mostly tracks with Fed estimates.



With inflation at <a href="https://cms.blockworks.co/bitcoin-loses-6-equities-fall-as-inflation-exceeds-estimates/" target="_blank" rel="noreferrer noopener">multiple-decade highs</a>, dollar-pegged stablecoins such as Circle’s USDC and Tether’s USDT depreciate in value relative to the cost of goods over time. A flatcoin such as nuon holds its value through periods of inflation. Coinbase CEO <a href="https://twitter.com/NuonFinance/status/1582234293740670976?s=20&amp;t=p7BrNSUJTbTIJ1WGdpuaBQ" target="_blank" rel="noreferrer noopener">Brian Armstrong</a> and Ethereum co-founder <a href="https://twitter.com/NuonFinance/status/1582234438033108992?s=20&amp;t=p7BrNSUJTbTIJ1WGdpuaBQ" target="_blank" rel="noreferrer noopener">Vitalik Buterin</a> have both advocated for cryptos pegged to the cost of goods rather than fiat currencies.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">A flatcoin, as mentioned by <a href="https://twitter.com/VitalikButerin?ref_src=twsrc%5Etfw">@VitalikButerin</a><a href="https://twitter.com/brian_armstrong?ref_src=twsrc%5Etfw">@brian_armstrong</a> <a href="https://twitter.com/balajis?ref_src=twsrc%5Etfw">@balajis</a> and many more recently, even tradfi people, a coin pegged to an independent inflation index, making it unaffectable by USD inflation or any centralized monetary policy. A cup of coffee costs 1 Nuon forever! <a href="https://t.co/e5uRecBOSQ">pic.twitter.com/e5uRecBOSQ</a>&mdash; Nuon Finance (@NuonFinance) <a href="https://twitter.com/NuonFinance/status/1583352418871672832?ref_src=twsrc%5Etfw">October 21, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Like most major stablecoins, nuon is intentionally overcollateralized — and will automatically liquidate user loans if the value of their collateral falls below a given level. The hurdle Nuon faces is maintaining an ever-increasing peg, as <a href="https://www.thebalancemoney.com/u-s-inflation-rate-history-by-year-and-forecast-3306093" target="_blank" rel="noreferrer noopener">US inflation</a> has occurred every year since 1954.&nbsp;



Nuon’s algorithm tinkers with the coin’s collateralization ratio so traders will keep the token at its peg. The <a href="https://cms.blockworks.co/terra-collapse-could-spell-end-for-algorithmic-stablecoins/" target="_blank" rel="noreferrer noopener">collapsed Terra stablecoin</a> used a similar system, though the coin was not fully collateralized. As long as investors are willing to mint and burn nuon, the flatcoin’s value ought to remain roughly flat — despite inflation.&nbsp;



Stefan Rust, CEO of nuon developer Laguna Labs, said he doesn’t see the token <a href="https://cms.blockworks.co/playing-the-were-not-terra-stablecoin-game/" target="_blank" rel="noreferrer noopener">competing</a> with the likes of Circle or Tether but hopes the flatcoin can <a href="https://cms.blockworks.co/bitcoin-joins-gold-as-an-inflation-hedge-while-inflation-spikes/" target="_blank" rel="noreferrer noopener">join bitcoin as investors’ go-to inflation hedge</a>.



“Bitcoin is an amazing hedge against inflation, but it has got a level of volatility to it,” Rust said. “We&#8217;re trying to blend the best of both worlds where we take the user experience from the stablecoin market and the<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market"> inflation hedge</a> from bitcoin.”



A TradFi analogue for flatcoins is <a href="https://europe.pimco.com/en-eu/resources/education/understanding-inflation-linked-bonds" target="_blank" rel="noreferrer noopener">inflation-linked bonds</a>, which adjust interest rates based on inflation and <a href="https://www.docdroid.net/PsAYm5Z/barclays-global-inflation-linked-products-a-users-guide-pdf#page=2" target="_blank" rel="noreferrer noopener">grew</a> in popularity following the Great Recession. Like inflation-linked bonds, flatcoins become a less desirable asset when inflation cools down.&nbsp;



“If deflation happens, you are underwater, if you will, but your purchasing power always stays the same,” Rust said.



Nuon is expected to going live in the first quarter of 2023. The flatcoin will go live on decentralized crypto exchanges before seeking approval to be listed on centralized exchanges.



Correction, Oct. 25, 8:22 am ET: The estimated value of one nuon flatcoin, if it was live on mainnet and available for trading today, is about $1.04 not $2.04, as originally stated.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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